DOCSLIB.ORG

The Current Account Balance and National Saving

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
The Current Account Balance and National Saving Iceland had a large current account deficit before the 2008 finan- Box 1 cial crisis, and national saving was at a historical low. The situation reversed during the aftermath of the crisis, and since 2009 there has been a large underlying current account surplus, about 6% of The current account GDP, on average. Not only is this a major turnaround from the im- mediate prelude to the crisis; it is also unusual in the context of Ice- balance and national land's longer economic history. The large current account surplus is saving based on a surge in national saving, which rose to a rarely seen high in 2016. The high level of saving and the current account surplus enhance the economy's ability to withstand unexpected economic shocks. If national saving has increased permanently, this should also contribute to a reduction in long-term real interest rates, other things being equal. This Box discusses developments in national sav- ing in Iceland and its relationship to the current account surplus in recent years. Current account, financial account, and national saving The current account balance shows the difference between the 51 value of goods and services produced in Iceland and exported to other countries and the value of goods and services imported to 2017•2 BULLETIN MONETARY Iceland. In addition, it shows residents' income from wages, interest, and dividends paid by foreign entities, as well as residents' expenses from these same items. The current account balance can also be thought of as the difference between domestic investment and sav- ing.1 A current account deficit reflects more domestic investment than domestic saving can support; therefore, the remaining invest- ment must be financed with inflows of savings from other countries. When there is a surplus, the opposite applies: domestic saving is greater than is needed to support domestic investment, and a por- tion of it is used to invest abroad; for instance, to purchase foreign assets or pay down foreign debt. How this excess saving is disposed of can be seen in the financial account balance, which shows chang- es in the balance of various asset and debt classes in the country's balance sheet. The current account surplus has never been as large over such a long period as it has since 2009 The post-crisis turnaround in the Icelandic economy can be seen in Chart 1, which shows developments in various macroeconomic variables before and after the crisis struck in 2008, in comparison with six periods after 1960 when Iceland has had a current account surplus. When it became impossible to finance a large current ac- count deficit, a steep drop in the real exchange rate resulted, with a corresponding contraction in imports. As the chart indicates, the current account balance went from a deficit of 16.7% of GDP in 2008 to an 8% surplus in 2009 (based on the underlying balance in 2008-2015).2 This turnaround in the current account balance is much more pronounced than has previously occurred in Iceland. There has been a continuous surplus on the current account since 2009, and the outlook is for a large surplus again in 2017, for the ninth year in a row. The surplus has ranged between 3% and 8% of 1. According to the national account identity (all variables at current prices), Y = C + G + I + X – M, where Y is gross domestic product, C is private consumption, G is public consumption, I is investment, X is exports, and M is imports. Gross national income is defined as GNI = Y + PI, where PI is primary income. Gross domestic saving is defined as the difference between GNI and consumption (private and public) S = GNI – C – G = I + X – M + PI = I + CA, where CA = X – M + PI is the current account balance. 2. The underlying current account balance excludes both the effects of the failed financial institutions in 2008-2015 and the effects of pharmaceuticals company Actavis in 2009- 2012 on the primary income balance. Adjustments have also been made for the failed financial institutions’ financial intermediation services indirectly measured (FISIM). BOXES Chart 1 Selected macroeconomic variables in the 2008 financial crisis and comparison with other current account surplus periods¹ Chart 1a Exports Chart 1b Imports Year-on-year change (%) Year-on-year change (%) 30 40 25 30 20 20 15 10 10 5 0 0 -10 -5 -10 -20 -15 -30 t-6 t-4 t-2 t t+2 t+4 t+6 t-6 t-4 t-2 t t+2 t+4 t+6 Chart 1c Current account balance Chart 1d Real exchange rate % of GDP Year-on-year change (%) 10 20 5 10 0 52 0 -10 -5 -20 -10 -30 -15 -40 -20 -50 -25 -60 t-6 t-4 t-2 t t+2 t+4 t+6 t-6 t-4 t-2 t t+2 t+4 t+6 MONETARY BULLETIN BULLETIN MONETARY 2017•2 Chart 1e Investment Chart 1f GDP Year-on-year change (%) Year-on-year change (%) 50 15 40 30 10 20 10 5 0 -10 -20 0 -30 -40 -5 -50 -60 -10 t-6 t-4 t-2 t t+2 t+4 t+6 t-6 t-4 t-2 t t+2 t+4 t+6 Financial crisis 2008 High-low range (excl. 2008 crisis) 1. Underlying current account balance 2008-2015. Year t is the first year of the current account surplus. There have been seven current account surplus periods since 1960, beginning in: 1961, 1969, 1978, 1986, 1993, 2002 and 2009. Sources: National Economics Institute, Statistics Iceland, Central Bank of Iceland. Chart 2 GDP over this period, averaging 6% per year. In comparison, over Current account balance, investment, the six comparison periods since 1960, the longest duration of a and national saving 1960-20161 continuous current account surplus was a period of three years, in 1993-1995, and the previous single-year peak was 3%, in 1962 % of GDP (Charts 1 and 2). 40 30 National saving in 2016 the second-highest ever recorded 20 During the pre-crisis upswing, increased investment went hand-in- 10 hand with steadily declining national saving. Saving measured just 0 under 21% of GDP in 2002 but had fallen to just above 9% of GDP -10 by 2008 (Chart 2). At the same time, the domestic spending level -20 was high, and investment peaked at 36% of GDP in 2006. Once -30 the crisis struck, domestic households and businesses no longer had ‘60 ‘65 ‘70 ‘75 ‘80 ‘85 ‘90 ‘95 ‘00 ‘05 ‘10 ’15 ready access to foreign credit to maintain this high level of spending. Current account balance As a result, they had to reduce their spending. Gross national saving Investment rose to nearly 23% of GDP in 2009 and has been close to that level, National saving on average, since then. With the past few years' rising export rev- 1. The underlying current account balance excludes both the effects of enues, saving has increased still further, measuring 29.3% of GDP in the failed financial institutions in 2008-2015 and the effects of pharma- ceuticals company Actavis in 2009-2012 on the primary income balance. 2016, some 11 percentage points above the historical average. Only Adjustments have also been made for financial intermediation services indirectly measured (FISIM). once has it exceeded this level – in 1965, when it measured 30.6% Sources: Statistics Iceland, Central Bank of Iceland. of GDP. Such a high level of saving has led to a sizeable current ac- BOXES count surplus even though investment has grown in recent years, reaching its historical average of just over 21% of GDP in 2016. Chart 3 National saving in 33 OECD countries Saving rate high in international context 1995-2016 Iceland’s national saving rate has historically been relatively low % of GDP compared with that in most other OECD countries (Chart 3). In 45 40 other OECD countries, saving commonly ranges between 20% and 35 25% of GDP, although there are certainly lower rates as well, such 30 as in the UK and the US, which have secure access to foreign credit 25 markets as global financial centres. Developments in domestic sav- 20 ing in recent years have therefore brought Iceland closer to its OECD 15 10 counterparts, and the past few years’ increase in saving places Ice- 5 land among the advanced economies with the highest saving ratios. 0 ‘95 ‘97 ‘99 ‘01 ‘03 ‘05 ‘07 ‘09 ‘11 ‘13 ‘15 Saving grew more in Iceland than elsewhere in the wake of the Iceland1 crisis Developed OECD countries (excl. Iceland) As is discussed above, the financial crisis catalysed a turnaround in G7 countries domestic saving. As Chart 4 shows, the post-crisis change was much Interquartile range (excluding Iceland) High-low range (excluding Iceland) 53 more pronounced in Iceland than it was, on average, in other coun- 3 2017•2 BULLETIN MONETARY tries. The saving ratio has a general tendency to fall immediately 1. Underlying national saving 2008-2015, based on the estimated underlying current account balance. after a financial crisis and then rise again, reaching its historical aver- Sources: IMF, Statistics Iceland, Central Bank of Iceland. age about four years after the onset of the crisis. In Iceland, how- ever, saving increased immediately after the crisis, as is mentioned above. The increase has also grown much larger and more rapid as time has passed. This reflects the 38% contraction in imports over a two-year period after the crisis – a reduction almost twice as large as the average in other countries.
Load more

Recommended publications
  • Fiscal Policies, Net Saving, and Real Exchange Rates: the United States, the Federal Republic of Germany, and Japan
    This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: International Aspects of Fiscal Policies Volume Author/Editor: Jacob A. Frenkel, ed. Volume Publisher: University of Chicago Press Volume ISBN: 0-226-26251-0 Volume URL: http://www.nber.org/books/fren88-1 Publication Date: 1988 Chapter Title: Fiscal Policies, Net Saving, and Real Exchange Rates: The United States, the Federal Republic of Germany, and Japan Chapter Author: Malcolm Knight, Paul Masson Chapter URL: http://www.nber.org/chapters/c7923 Chapter pages in book: (p. 21 - 72) 2 Fiscal Policies, Net Saving, and Real Exchange Rates: The United States, the Federal Republic of Germany, and Japan Malcolm D. Knight and Paul R. Masson 2.1 Introduction In recent years, substantial changes in the pattern of fiscal positions of major industrial countries have occurred. From 1981 to 1985, for example, the fiscal deficit of the U.S. federal government is estimated to have risen by 2.8% of the U.S. GNP, while the deficits of central governments in the Federal Republic of Germany and Japan, both of which have implemented medium-term fiscal restraint programs, de- clined by about 0.6% of their GNPs. A better measure of the underlying stance of policy, the fiscal impulse as a percent of GNP cumulated over the years 1981-85, shows a shift in the United States toward expansion by 3% and contractionary shifts of 1.9% in the Federal Republic of Germany and 0.8% in Japan (International Monetary Fund 1985, Ap- pendix table 15).
    [Show full text]
  • Helicopter Ben, Monetarism, the New Keynesian Credit View and Loanable Funds
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Fiebinger, Brett; Lavoie, Marc Working Paper Helicopter Ben, monetarism, the New Keynesian credit view and loanable funds FMM Working Paper, No. 20 Provided in Cooperation with: Macroeconomic Policy Institute (IMK) at the Hans Boeckler Foundation Suggested Citation: Fiebinger, Brett; Lavoie, Marc (2018) : Helicopter Ben, monetarism, the New Keynesian credit view and loanable funds, FMM Working Paper, No. 20, Hans-Böckler- Stiftung, Macroeconomic Policy Institute (IMK), Forum for Macroeconomics and Macroeconomic Policies (FFM), Düsseldorf This Version is available at: http://hdl.handle.net/10419/181478 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available
    [Show full text]
  • THE MAGIC MONEY TREE: the Case Against Modern Monetary Theory
    THE MAGIC MONEY TREE: The case against Modern Monetary Theory Antony P. Mueller The Adam Smith Institute has an open access policy. Copyright remains with the copyright holder, but users may download, save and distribute this work in any format provided: (1) that the Adam Smith Institute is cited; (2) that the web address adamsmith.org is published together with a prominent copy of this notice; (3) the text is used in full without amendment [extracts may be used for criticism or review]; (4) the work is not re–sold; (5) the link for any online use is sent to info@ adamsmith.org. The views expressed in this report are those of the authors and do not necessarily reflect any views held by the publisher or copyright owner. They are published as a contribution to public debate. © Adam Smith Research Trust 2019 CONTENTS About the author 4 Executive summary 5 Introduction 7 1 What is Modern Monetary Theory? 10 2 Mosler Economics 16 3 Theoretical foundations 21 4 The Neo-Marxist Roots of MMT 26 5 Main points of critique 34 Conclusion 45 ABOUT THE AUTHOR Professor Antony P. Mueller studied economics, political science, and philosophy along with foreign relations in Germany with study stays in the United States (Center for the Study of Public Choice in Blacksburg, Va.), in England, and in Spain and obtained his doctorate in economics from the University of Erlangen-Nuremberg (FAU). He was a Fulbright Scholar in the United States and a visiting professor in Latin America - including two stays at the Universidad Francisco Marroquin (UFM) in Guatemala.
    [Show full text]
  • Deflation: Economic Significance, Current Risk, and Policy Responses
    Deflation: Economic Significance, Current Risk, and Policy Responses Craig K. Elwell Specialist in Macroeconomic Policy August 30, 2010 Congressional Research Service 7-5700 www.crs.gov R40512 CRS Report for Congress Prepared for Members and Committees of Congress Deflation: Economic Significance, Current Risk, and Policy Responses Summary Despite the severity of the recent financial crisis and recession, the U.S. economy has so far avoided falling into a deflationary spiral. Since mid-2009, the economy has been on a path of economic recovery. However, the pace of economic growth during the recovery has been relatively slow, and major economic weaknesses persist. In this economic environment, the risk of deflation remains significant and could delay sustained economic recovery. Deflation is a persistent decline in the overall level of prices. It is not unusual for prices to fall in a particular sector because of rising productivity, falling costs, or weak demand relative to the wider economy. In contrast, deflation occurs when price declines are so widespread and sustained that they cause a broad-based price index, such as the Consumer Price Index (CPI), to decline for several quarters. Such a continuous decline in the price level is more troublesome, because in a weak or contracting economy it can lead to a damaging self-reinforcing downward spiral of prices and economic activity. However, there are also examples of relatively benign deflations when economic activity expanded despite a falling price level. For instance, from 1880 through 1896, the U.S. price level fell about 30%, but this coincided with a period of strong economic growth.
    [Show full text]
  • Principles of Macro - Fall 2008 - EXAM 2
    Principles of Macro - Fall 2008 - EXAM 2 Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. ____ 1. Which of the following is true? a. Although levels of real GDP per person vary substantially from country to country, the growth rate of real GDP per person is similar across countries. b. Productivity is not closely linked to government policies. c. The level of real GDP per person is a good gauge of economic prosperity, and the growth rate of real GDP per person is a good gauge of economic progress. d. Productivity may be measured by the growth rate of real GDP per person. ____ 2. The average amount of goods and services produced from each hour of a worker's time is called a. per capita GDP b. per capita GNP c. productivity d. human capital ____ 3. Cedar Valley Furniture uses 5 workers working 8 hours to produce 80 rocking chairs. What is the productivity of these workers? a. 2 chairs per hour. b. 1 hour per chair. c. 80 chairs. d. None of the above are correct. ____ 4. Which of the following is a part of your Economics professor's human capital? a. the things he learned at some prestigious university b. his copy of Mankiw's text c. his computer d. All of the above are correct. ____ 5. Which of the following lists contains, in this order, natural resources, human capital, and physical capital? a. For a restaurant: the produce used to make salad, the things the Chef learned at Cooking School, the freezers where the steaks are kept.
    [Show full text]
  • National Saving and International Investment
    This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: National Saving and Economic Performance Volume Author/Editor: B. Douglas Bernheim and John B. Shoven, editors Volume Publisher: University of Chicago Press Volume ISBN: 0-226-04404-1 Volume URL: http://www.nber.org/books/bern91-2 Conference Date: January 6-7, 1989 Publication Date: January 1991 Chapter Title: National Saving and International Investment Chapter Author: Martin Feldstein, Philippe Bacchetta Chapter URL: http://www.nber.org/chapters/c5992 Chapter pages in book: (p. 201 - 226) 7 National Saving and International Investment Martin Feldstein and Philippe Bacchetta 7.1 Introduction Do tax policies that stimulate a nation’s private saving rate increase its do- mestic capital stock or do the extra savings flow abroad? Does an increase in the corporate tax rate cause an outflow of capital that shifts the burden of that tax increase to labor and land? These were the two key questions that motivated the 1980 Feldstein- Horioka (FH) study of the relation between domestic saving rates and domes- tic investment. FH reasoned that, if domestic saving were added to a world saving pool and domestic investment competed for funds in that same world saving pool, there would be no correlation between a nation’s saving rate and its rate of investment. The statistical evidence showed that, on the contrary, the long-term saving and investment rates of the individual industrialized countries in the OECD are highly correlated. The data were consistent with the view that a sustained one-percentage-point increase in the saving rate in- duced nearly a one-percentage-point increase in the investment rate.
    [Show full text]
  • From Long-Term Growth to Secular Stagnation. a Theoretical Comparison Between Régulation Theory, Marxist Approaches and Present Mainstream Interpretations
    FROM LONG-TERM GROWTH TO SECULAR STAGNATION. A THEORETICAL COMPARISON BETWEEN RÉGULATION THEORY, MARXIST APPROACHES AND PRESENT MAINSTREAM INTERPRETATIONS Giovanni Scarano ISSN 2279-6916 Working papers (Dipartimento di Economia Università degli studi Roma Tre) (online) Working Paper n° 241, 2018 I Working Papers del Dipartimento di Economia svolgono la funzione di divulgare tempestivamente, in forma definitiva o provvisoria, i risultati di ricerche scientifiche originali. La loro pubblicazione è soggetta all'approvazione del Comitato Scientifico. Per ciascuna pubblicazione vengono soddisfatti gli obblighi previsti dall'art. l del D.L.L. 31.8.1945, n. 660 e successive modifiche. Copie della presente pubblicazione possono essere richieste alla Redazione. esemplare fuori commercio ai sensi della legge 14 aprile 2004 n.106 REDAZIONE: Dipartimento di Economia Università degli Studi Roma Tre Via Silvio D'Amico, 77 - 00145 Roma Tel. 0039-06-57335655 fax 0039-06-57335771 E-mail: [email protected] http://dipeco.uniroma3.it FROM LONG-TERM GROWTH TO SECULAR STAGNATION. A THEORETICAL COMPARISON BETWEEN RÉGULATION THEORY, MARXIST APPROACHES AND PRESENT MAINSTREAM INTERPRETATIONS Giovanni Scarano Comitato Scientifico: Fabrizio De Filippis Francesco Giuli Anna Giunta Paolo Lazzara Loretta Mastroeni Silvia Terzi FROM LONG-TERM GROWTH TO SECULAR STAGNATION. A THEORETICAL COMPARISON BETWEEN RÉGULATION THEORY, MARXIST APPROACHES AND PRESENT MAINSTREAM INTERPRETATIONS Giovanni Scarano* Roma Tre University Department of Economics [email protected] Abstract Since 2013 various eminent mainstream economists have proposed reviving the doctrine of “secular stagnation”. According to these authors, the only explanation for this new trend could be a negative Wicksellian natural rate of interest, produced by an excess of saving over investment at any positive interest rate.
    [Show full text]
  • Individual Behaviors and Collective Welfare: Ramsey’S ” Microfoundations ” of ” Macro-Equilibrium ” Marion Gaspard
    Individual Behaviors and Collective Welfare: Ramsey’s ” microfoundations ” of ” macro-equilibrium ” Marion Gaspard To cite this version: Marion Gaspard. Individual Behaviors and Collective Welfare: Ramsey’s ” microfoundations ” of ” macro-equilibrium ”. Conference on the History of Macroeconomics, R. Backhouse, P. Bridel, M. De Vroey, Jan 2005, Louvain la Neuve, Belgium. halshs-01162036 HAL Id: halshs-01162036 https://halshs.archives-ouvertes.fr/halshs-01162036 Submitted on 9 Jun 2015 HAL is a multi-disciplinary open access L’archive ouverte pluridisciplinaire HAL, est archive for the deposit and dissemination of sci- destinée au dépôt et à la diffusion de documents entific research documents, whether they are pub- scientifiques de niveau recherche, publiés ou non, lished or not. The documents may come from émanant des établissements d’enseignement et de teaching and research institutions in France or recherche français ou étrangers, des laboratoires abroad, or from public or private research centers. publics ou privés. Individual Behaviors and Collective Welfare: Ramsey’s “microfoundations” of “macro-equilibrium” Marion Gaspard♣ UMR Triangle, Pôle Auguste et Léon Walras, Université Lumière yon 2 I. Introduction Since the end of 1970’s -and the success of the New Classical School –, the face of macroeconomics has changed profoundly. On the one hand, the research has turned gradually away from the analysis of the short-term fluctuations to favor a study of the long term determining factors of macroeconomic variables. One has studied the determinants of growth and has interpreted the cycles as fluctuations around these long-term values. On the other hand and in the same movement, one saw setting itself a general equilibrium macroeconomics.
    [Show full text]
  • China's High Saving Rate
    BIS Working Papers No 312 China’s high saving rate: myth and reality by Guonan Ma and Wang Yi Monetary and Economic Department June 2010 JEL classification: E20; E21; O11; O16; O53 Keywords: Saving; corporate, household and government saving; Chinese economy BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS. Copies of publications are available from: Bank for International Settlements Communications CH-4002 Basel, Switzerland E-mail: [email protected] Fax: +41 61 280 9100 and +41 61 280 8100 This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2010. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISSN 1020-0959 (print) ISBN 1682-7678 (online) China’s high saving rate: myth and reality Guonan Ma and Wang Yi1 Abstract The saving rate of China is high from many perspectives – historical experience, international standards and the predictions of economic models. Furthermore, the average saving rate has been rising over time, with much of the increase taking place in the 2000s, so that the aggregate marginal propensity to save exceeds 50%. What really sets China apart from the rest of the world is that the rising aggregate saving has reflected high savings rates in all three sectors – corporate, household and government.
    [Show full text]
  • Current National Saving Certificate Interest Rate
    Current National Saving Certificate Interest Rate Clay is flightily adjective after vexing Boris egest his megajoule officially. Uncommunicative Augustus sometimes luteinized his hubble-bubbles suddenly and wyted so askance! Full-sailed Geof never revelled so grumblingly or lacerates any Alec impurely. When rates from interest rate of national savings and fill the government securities which the current pockets because it when will take risks. Find the sindh police has handled various details of the inflation rate of girls aged below the solution ltd. Log in case of cds will be purchased for the issue a down payment is best strategy in the case they will write to fill necessary details. Since the performance is unlikely to its savings certificate of the best to such schemes are nsc is a valuation for the provident fund. Card and interest rates? Published on behalf of best aligned towards low fees are investment schemes to interest in this interest will lose some are not amount is nsc interest earned. Each joint holding an investor can benefit nullifies the current fixed for your money market conditions are much money allocated into the original investment options such accounts. Minor or national saving certificates were asking for? Easy access to save yourself and savings certificates you becomes taxable income and if rates mentioned above. Remember that interest rates and national do it may be easily be extended period of current month. Figure provide a savings rates for regular pension fund, currently not save or username incorrect email address proof of current term. On the time of investment when choosing a brand of the near you can help you should you can read.
    [Show full text]
  • Page 1 Econ 303: Intermediate Macroeconomics I Dr. Sauer
    Econ 303: Intermediate Macroeconomics I Dr. Sauer Sample Questions for Exam #1 1. Variables that a model tries to explain are called: A) endogenous. B) exogenous. C) market clearing. D) fixed. 2. A measure of how fast prices are rising is called the: A) growth rate of real GDP. B) inflation rate. C) unemployment rate. D) market-clearing rate. 3. Deflation occurs when: A) real GDP decreases. B) the unemployment rate decreases. C) prices fall. D) prices increase, but at a slower rate. 4. A severe recession is called a(n): A) depression. B) deflation. C) exogenous event. D) market-clearing assumption. 5. The assumption of flexible prices is a more plausible assumption when applied to price changes that occur: A) from minute to minute. B) from year to year. C) in the long run. D) in the short run. 6. During the period between 1900 and 2000, the unemployment rate in the United States was highest in the: A) 1920s. B) 1930s. C) 1970s. D) 1980s. 7. The assumption of continuous market clearing means that: A) sellers can sell all that they want at the going price. B) buyers can buy all that they want at the going price. C) in any given month, buyers can buy all that they want and sellers can sell all that they want at the going price. D) at any given instant, buyers can buy all that they want and sellers can sell all that they want at the going price. 8. The total income of everyone in the economy adjusted for the level of prices is called: A) a recession.
    [Show full text]
  • Intermediate Macroeconomics: New Keynesian Model
    Intermediate Macroeconomics: New Keynesian Model Eric Sims University of Notre Dame Fall 2012 1 Introduction Among mainstream academic economists and policymakers, the leading alternative to the real business cycle theory is the New Keynesian model. Whereas the real business cycle model features monetary neutrality and emphasizes that there should be no active stabilization policy by govern- ments, the New Keynesian model builds in a friction that generates monetary non-neutrality and gives rise to a welfare justification for activist economic policies. New Keynesian economics is sometimes caricatured as being radically different than real business cycle theory. This caricature is unfair. The New Keynesian model is built from exactly the same core that our benchmark model is { there are optimizing households and firms, who interact in markets and whose interactions give rise to equilibrium prices and allocations. There is really only one fundamental difference in the New Keynesian model relative to the real business cycle model { nominal prices are assumed to be \sticky." By \sticky" I simply mean that there exists some friction that prevents Pt, the money price of goods, from adjusting quickly to changing conditions. This friction gives rise to monetary non-neutrality and means that the competitive equilibrium outcome of the economy will, in general, be inefficient. New Keynesian economics is to be differentiated from \old" Keynesian economics. Old Keyne- sian economics arose out of the Great Depression, adopting its name from John Maynard Keynes. Old Keynesian models were typically much more ad hoc than the optimizing models with which we work and did not feature very serious dynamics.
    [Show full text]